It’s a popular notion that insurance products are push products. You don’t really feel the need for insurance unless a calamity drives home the realisation. So you need an intermediary—you know them as agents or brokers—to act as a go-between the insurer and you, the customer, and convince you to buy insurance. Things, however, are slowly changing as awareness is picking up and customers are lining up to buy insurance products on their own.

Direct sale is picking up and the latest notification by the Insurance Regulatory and Development Authority of India (Irdai) refers to handling of commissions embedded in insurance products that are sold directly rather than through an intermediary. In a circular issued on 25 January, the regulator observed that insurance companies were paying commissions embedded in insurance products to intermediaries even when the sale was direct and not routed through them.

The circular, accordingly, advised insurers to refrain from this practice. “The Authority hereby advises the insurers not to book new or renew the business directly received from customer in the name of the insurance intermediaries and shall refrain from remunerating them for such direct new or renewal business," noted the circular.

What is direct sale?

It’s important to understand that direct sale is not the same as a zero load product which is free of commissions. Direct sale simply means the customers reach out to the insurer directly to buy a product.

“When customers buy products online themselves by going to the insurer’s website or even when they buy products offline either by approaching the insurer directly or through their direct sales force that are salaried employees of the insurer, it’s termed as direct sale because no intermediary is involved," said C.L. Baradhwaj, executive vice-president, legal and compliance and company secretary, Future Generali India Life Insurance Co. Ltd.

A direct sale or purchase doesn’t automatically ensure a commission-free purchase. “The commissions are embedded in insurance products at the time of file and use. So unless the product expressly states a lower premium for direct sales, the same premium is charged even when a product is logged under direct sale," said Puneet Sahni, head, product development, SBI General Insurance Co. Ltd. The commissions technically get retained by the insurer and are used to meet expenses.

direct mandate

According to the circular, even direct sales are getting logged under intermediary code. An Irdai official we spoke to said the circular largely pertains to non-life insurers as direct sales comprise nearly one-third of the business.

“Some insurers are giving codes of agents even when the policy was sold directly thereby enabling the agent to earn a commission on a direct sale. One of the reasons why insurers assign an intermediary even under direct sale is to service the policy. Commissions (including subsequent renewal commissions), however, are paid to intermediaries on the sale of a product. So when an intermediary has not sold a product, she doesn’t have the right to the commission," said the official.

The circular aims to ensure that intermediaries are not remunerated unnecessarily and only those who actually sell products are able to pocket the money.

what it means

From a customer standpoint this may not really translate into cheaper products, given that embedded commissions even under direct sales may not be passed on to customers.

However, it’s a step towards ensuring better hygiene in the industry. First-year commission on sale of bundled regular premium life insurance plans can be as high as 35% (excluding rewards). In the case of non-life products, the commission can be up to 15% of the premium (excluding rewards). The amount of commissions, therefore, is substantial in insurance products to be given away to intermediaries as a freebie or to keep them motivated even when they don’t clock in sales. The Irdai circular aims to curb such practices.